As the sub prime mortgage mess has unfolded over the last few months, reverse mortgages have gotten some positive press about being outside the fray and largely unaffected by the turmoil.

No more.

In the last week, several lenders and brokers have ceased origination of the new and popular HECM 100 reverse mortgages (more…)

HECMs Were Once Equal

A few months ago, the Home Equity Conversion Mortgage (HECM) was a complex, but still plain-vanilla type of reverse mortgage. A HECM was pretty much the same no matter who the lender might be. Today, as reverse mortgage popularity (and lender competition) has exploded, HECMs have evolved into a multi-headed hydra with confusing new features and and an even more confusing array of copyrighted “private label” names.

We thought it would be useful for seniors trying to wade through this marketing jungle to be aware of the key traits that set one type of HECM apart from another.

Is It Really a HECM?

The rising popularity of reverse mortgages hasn’t been limited to HECM’s. Other, non-FHA reverse mortgages have multiplied in recent months as well with tradenames that seem designed to confuse: “CashKeeper”, “Simple Zero Cash Account”, “Generation Plan”, “Independence Plan”, etc., etc. Many of these products are targeted at the “jumbo” housing market - homes with values over $450,000. These loans are not FHA-insured, nor are they restricted in size by FHA 203b loan limits. For owners of high value homes, jumbo products can provide benefits not available through the HECM reverse mortgage program.

But for the average senior homeowner in most parts of the country, a HECM reverse mortgage is usually the best avenue to take. So, if this describes you, 50% or more of the marketing confusion can be eliminated by simply asking the question “Is it an FHA-insured reverse mortgage?” and focusing only on products that meet this test.

Is It a Variable Rate or Fixed Rate HECM?

Until very recently, all HECM reverse mortgages were variable rate loans with interest rates that changed monthly or annually, depending on the borrowers preference. In March 2007 BNY Mortgage unveiled a fixed rate HECM that allows borrowers to “lock-in” an interest rate for the life of the loan. You may come across this product under different private label names such as “New Generation HECM” or “Fixed4Life”. And, if past experience is a guide, it is likely competing products will emerge from other lenders very quickly.

There are many sides to the fixed vs variable rate decision that we will discuss in a future article. The volume of fixed rate HECMs is presently quite small, but is certain to grow. It may be worth your while to look into one of the fixed rate options, but, for now, if you are following the crowd, focus on sorting out the confusing menu of variable rate HECM products.

What’s the HECM Margin?

The primary feature that distinguishes variable-rate HECM loans from one another is the interest rate margin. For several years, the most popular type of HECM loan carried a standard 1.50% margin over the one-year US Treasury Rate. This margin was determined by investors who purchased HECM mortgages, particularly Fannie Mae, the quasi-government agency who for many years was the sole investor in HECM reverse mortgages.

In late 2006, BNY Mortgage introduced the HECM 100, which carried a margin of only 1.00%. For borrowers, the lower margin translated into lower loan costs and more upfront cash. The HECM 100 quickly became the new reverse mortgage standard and other lenders introduced similar products to compete.

But higher margin HECMs haven’t gone away just yet. Lenders continue to offer “HECM 150″, “HECM 125″ and even HECMs with margins that “float” from month to month. In theory, this offers the consumer more choices. But, in almost all cases the 1.00 margin HECM products will be the best choice.

Bottomline: New product introductions and private label naming have helped make the reverse mortgage market more confusing than ever. For mainstream borrowers with average-priced homes, a lot of the confusion can be cut through by simply focusing on the 1.00% margin HECM loans.

A few weeks ago we wondered why some lenders were still promoting reverse mortgages carrying a 1.50% margin along side of newer, basically identical HECM products that carried only a 1.00% margin - a much better deal for the borrower. At the same time they promoted lower costs, higher cash availability and other benefits of the new HECM 100 loans, lenders trumpeted the continued availability HECM 150 loans offering “greater options for senior borrowers.”

We even checked with these lenders to see why a senior homeowner would “choose” a HECM 150 instead of a HECM 100 and no could give a rational reason why someone would make this choice.

We were reminded of this today when we saw this post from Next Generation Financial Services, a subsidiary of 1st Mariner Bank directing lenders in the field to “recommend the HECM 100 as the loan of choice to our senior clients.”

We have run extensive scenarios on all three of the monthly Reverse Mortgage programs listed above. Without a doubt the HECM 100 is, at present, the best loan of choice when working towards “Doing What’s Right for the Senior”. Whenever an application is requested from the field, if listed on the comparison and other documents as a HECM 150 or HECM Advantage, the application will be challenged by the home office to substantiate why the monthly HECM 100 was not used. The HECM 150 is only appropriate in the event the senior wishes an annual as opposed to a monthly interest adjustment.

In the complex, confusing world of reverse mortgages (made more so with frequent new product introductions), it’s refreshing to see a lender publicly cut through some of the confusion and give some straightforward direction.

We noted in our last post the growing number of announcements of new, reduced-margin Home Equity Conversion Mortgages (HECMs). Just about every reverse mortgage lender around is touting a new HECM 100, HECM +100 or some variation thereof. These loans are the same as a standard Home Equity Conversion Mortgage (HECM) but charge borrowers a reduced rate of interest (1% over the one-year US Treasury rate instead of 1.50%). Clearly, welcome news for seniors thinking about becoming HECM mortgage borrowers.

But some of the announcements imply further borrower benefits: greater choice than ever before. Seattle Mortgage, for example:

These enhancements will offer senior borrowers the option to compare 1.00, 1.25, and 1.50 margins on the monthly adjustable HECM and 2.60, 2.85, and 3.10 margins on the annually adjustable HECM.

“The new margins available represent an opportunity to provide greater options for senior borrowers. Seniors have a vast array of financial needs, and products such as these provide the options they require to fit their particular situation,” says John Nixon, Executive Vice President and COO of Seattle Mortgage.

Sun West Mortgage:

Sun West Mortgage Company, Inc., one of the leading innovators in the reverse mortgage industry, is proud to offer the HECM 100 and 125 to complement the traditional HECM150 product. These new HECM products allow Sun West’s broker partners to remain competitive as the secondary market for reverse mortgages becomes more efficient.

At first blush, this sounds great - more HECM options and lower costs to boot! But wait a minute. Something’s missing. What additional benefits does the borrower get for choosing a more expensive HECM 125 or HECM 150 loan? More upfront cash? Lower closing costs? A toaster?

Ummmm no. Quick calls to both Seattle and Sun West disclosed that there are no sound reasons for a borrower faced with the 3 options to select the HECM 125 or 150 products over the lowest margin HECM loan.

Probably lenders are keeping the higher margin HECMs around to use in rural markets and areas where they don’t face stiff competition (yet). But if maintaining these higher-margin products under the guise of “customer choice” has some short term benefits for lenders, it probably doesn’t help build longer-term public trust in reverse mortgage products. A recent Fidelity Research Institute survey found that “lack of trust of the product” was one of the primary reasons senior homeowners choose not to utilize reverse mortgages.

We previously noted the competition heating up in the reverse mortgage arena with BNY Mortgage and Wells Fargo each announcing modified Home Equity Conversion (HECM) reverse mortgage products. Both lenders recently chiseled one-half percent off the interest rate charged to senior homeowner/borrowers. HECM reverse mortgages are by far the most popular type of reverse mortgage accounting for as much 90% of all reverse mortgage originations.

The new twist on HECM reverse mortgages is good news for borrowers but also adds more options and more confusion to an already complex subject. As if trying to differentiate among the HECM, HomeKeeper, and Financial Freedom reverse mortgages isn’t enough, reverse mortgage shoppers can now add to their vocabulary the HECM 100 (BNY) and the HECM +100 (Wells Fargo)

If the names HECM 100 and HECM +100 seem just about identical, the loan terms are pretty close as well. To check out how the new HECM loan options compare with one another we thought it useful to compare them side-by-side. Thankfully, the websites for both Wells Fargo and BNY use the same underlying calculators. We ran a couple of identical scenarios on each calculator to see how the products matched up for the most popular type of reverse mortgage - the monthly-adjusting HECM. Here are the results (run 2/9/07) for a couple (birthdates 12/15/28 and 6/15/30) with a home valued at $200,000:

As you can see, the loans are identical up to the service fee set aside. BNY assesses a $35/month over the projected life of the loan while Wells charges $30/month. This difference ultimately impacts the loan amount available to you.

Of course, things do change and it always pays to compare loan terms using lender’s on-line calculators. But if you are in an area where either BNY or Wells can service you, it appears that (for now) the Wells Fargo product has the advantage. As for other HECMs offered by lenders who’ve not dropped rates, they’re really not even in the race at this point.

When we wrote about Bank of New York’s (BNY) new HECM 100 a couple of weeks ago, we noted that the product set a new standard by lowering borrowers’ interest cost on-half percent and that “competing lenders will have little choice but to respond with innovative products of their own.”

Now Wells Fargo Home Mortgage, the largest originator of HECM loans has announced it will cut its margin on new HECM loans starting with applications taken on or after February 5, 2007. Here’s the complete text of Wells’ press release:

Wells Fargo Home Mortgage, the nation’s leading retail originator of reverse mortgages, will trim the margin it charges on a government-insured reverse mortgage product and begin offering the federally insured, variable Home Equity Conversion Mortgage (HECM) product using a lower margin for loan applications taken on or after Feb. 5, 2007.

In addition, effective Feb. 6, 2007, seniors who have already applied for a reverse mortgage with Wells Fargo will be offered the lower margin. This change will save borrowers money over the life of their loan and give them greater access to their home equity.

“Reverse mortgages are about making the most of the equity that seniors have built into their homes,” said Jeff Taylor, vice president of Wells Fargo’s Senior Products Group. “By lowering the margin, we are lowering the interest rate charged on a reverse mortgage. This means more seniors will be able to use the reverse mortgage program, giving them the ability to turn their home equity into additional retirement funds.”

Wells Fargo is cutting the margin on its variable HECM by 50 basis points.

It’s a move that will give seniors greater access to their home equity. As an example, a senior who is 70 years old with a home valued at $300,000 could get approximately $14,100 more in borrowing capacity than with a higher-margin HECM loan.

The HECM reverse mortgage is the most popular reverse mortgage in America today. Through the program, the U.S. Department of Housing and Urban Development insures mortgages that allow homeowners age 62 or over to convert their home equity into tax-free income. The program has insured over 200,000 reverse mortgages since 1990.

With a HECM, a senior homeowner receives proceeds from a lender — either in a lump sum, regular monthly payments, a line of credit or a combination of these. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.

Wells Fargo Home Mortgage helped senior Americans secure nearly one-third of all reverse mortgages originated in 2006.

Clearly, Wells announcement is in response to BNY’s HECM 100 and the half-percent rate relief is the cornerstone of each bank’s product. But it’s not immediately clear how other features and details of the loans may have changed (if at all) or how the banks’ offerings stack up against each other.

Nor is it clear how other lenders will react. According to HUD’s monthly HECM activity reports, Wells and BNY were the #1 and #11 originators of HECM loans endorsed during January 2007. Together, the banks account for 2,151 (24.4%) of the 8,824 loans endorsed during the first moth of the year (not taking into account activity by any affiliated lenders). It will be interesting to see how their market share changes and what actions other lenders take in the weeks ahead.

But in any case, Well Fargo’s announcement signals more competition and is more good news for the borrower/consumer. We hope to have more information in the near future.

Earlier this month we reported on a Wall Street Journal piece that recommended holding off on a getting a reverse mortgage because of changes in the works that could benefit consumers. The first of these changes came last week last week with the announcement by BNY Mortgage Company (BNYMC) of their new HECM 100 reverse mortgage:

HECM 100 is a federally insured HECM loan that offers lower interest rates than a traditional HECM, saving borrowers significantly in costs over the life of the loan while giving them immediate access to more cash.

HECM 100 adds choice to the reverse mortgage buying equation, allowing consumers to borrow more money at a lower overall cost.

For example, a reverse mortgage customer age 70, with a home valued at $300,000 can receive approximately $13,000 more in borrowing capacity with a HECM 100 than the traditional HECM loan. At today’s interest rates, the homeowner will save approximately $28,000 in interest costs over the expected life of the average loan.

So how is BNY able to accomplish this? In a word - competition.

For years the single “buyer” of federally-insured home equity conversion mortage (HECM) loans from originating lenders has been Fannie Mae, the quasi-governmental agency that specializes in buying loans (and reselling them to investors) to maintain liquidity in the mortgage market. Since 2001, Fannie Mae has dictated that in order for it to buy HECM reverse mortgages, it required a markup 1.50% above the one-year US Treasury rate. This markup is passed on to borrowers in the form of a higher effective loan interest rate.

Now, BNY has found investors willing to purchase the same HECM loans at a markup of just 1.00%. Here’s a rate comparison of the new HECM 100 to the standard HECM using interest rates as of the week of January 9th:

(As shown, one side-effect of the lower loan rate is a correspondingly lower credit line “growth rate”, if this payment option is chosen.)

Bringing new competitive forces into the reverse mortgage is great news for potential borrowers. Even officials of the US Department of Housing and Urban Development (HUD) are praising the new HECM 100:

“BNYMC’s introduction of the new HECM 100 product is wonderful news for senior homeowners because it offers the consumer more money at lower costs,” said Meg Burns, director, Single Family Program Development, U.S. Department of Housing and Urban Development. “This is exactly the kind of product innovation the reverse mortgage industry needs in order to help older homeowners live a more comfortable and financially secure life.”

The HECM 100 is now available directly from BNYMC throughout Connecticut, Delaware, Florida, Georgia, Maine, Massachusetts, New Jersey, New York, Pennsylvania, and Rhode Island. In addition, HECM 100 will be available from select BNYMC wholesale partners throughout the United States.

Clearly, BNY has set the bar higher and competing lenders will have little choice but to respond with innovative products of their own. In the near term, don’t be surprised to see sales pitches and pressure tactics to get deals closed escalate. If you’re in the market for a reverse mortgage and can afford to wait, you should. At a minimum, take a look at the BNY reverse mortgage calculator to see what the HECM 100 could mean to you.

More information and opinions on the new HECM 100 reverse mortgage can be found at the ReverseMortgageDaily blog.